Upcoming Bear Speed Bumps

uptick ruleFinally, we reached the end of a crazy week of trading. There were many times during the day on Friday where I worried about another 200 point reversal like we saw the day before. However, bears were able to maintain control of the market for pretty much the whole day and end the Dow lower 144 points, which is a good sign that indeed this rally may be slowing. But before I go and position myself in a strong short position, there are a few speed bumps for bears that are definitely worth discussing. I discuss them in more detail on today's podcast (subscribe here), but lets cover some of them right now:

Although the bear market rally was expected, the strength of the rally has been much stronger than anticipated. The angle of the upswing is much more vertical than that of the rally we experienced back in November. We have retraced our previous sell off about 50%, which is usually normal in an environment like this. This could mean that the rally has opportunities to creep up into the mid 8000 Dow levels. 8000-9000 are the key technical numbers I keep hearing about this rally. If we indeed are heading to mid 8000 levels, I definitely don't want to be caught short. Now, I do think we won't be as violent as we've been and may bobble around up around 8000, but the risk is still there.

Mark to Market Meeting
On April 2, there will be a meeting to discuss the altering of mark to market accounting, which would cause for a big help for bank's balance sheets. This obviously won't be the savior for banks, but it should definitely spark some buying for at least a few of days. This is all depending whether they actually go forward with some alteration in the accounting method (which I believe they will). So keep your eyes on that date, because that could most definitely shake some things up.

Bank's Earnings
This is a side bonus for bulls if the mark to market accounting does get altered. By changing it, most likely bank's will begin, at least on paper, to start to show some profits. GS is the first of the bunch to report on April 13th, which I feel regardless of the accounting change will show positive numbers. Multiple positive earnings reports could continue to pull this rally into the mid 8000's.

Uptick Rule
This is the least of my worries out of the bunch. Sure, reinstating it may cause some positive trading for a short term, but I feel the effect it has on the market is minimal. In 2005 they ran a test to gauge the uptick's influence on market manipulation, and concluded that that the rule did not prevent manipulation. Bears will always short, with or without the uptick.

So there definitely exists enough variables to keep me from fully positioning myself short. Indeed, if conditions get worse enough we could sell right through these speed bumps, but I do feel there will still remain some buying. So, I don't feel we're at the position yet for me to be comfortable getting into a much stronger short position. I do have some, but not near as much as I will have when I feel it's time. There are a lot of signs that we are close, but not quite there. Next week will be an important week in defining the remaining strength of the rally, especially how we react to the mark to market meeting on April 2nd, which I believe should cause the biggest shake in the markets out of all the news.

So gear up for another exciting week. I think the VIX may take a ride this week as I believe our daily spreads are going to start increasing dramatically very soon. Have a great weekend and Happy Trading.


  1. Anonymous Says:

    ALL BUSINESS: Bank fix-it plans may collide

    By RACHEL BECK – 1 day ago

    NEW YORK (AP) — Two plans to attack the credit crisis are careening into each other.

    The Obama administration is trying to re-ignite lending by enticing private lenders to buy the toxic assets that have been stuck on the balance sheets of banks.

    But the plan could be undercut by another initiative: relaxing accounting rules that determine how the assets are valued. That might boost the prices of those assets, making it harder to sell them.

    "Imagine if we do all this and nothing changes for the better, and the banks still don't lend," said Roger Ehrenberg, who runs his own investment firm and writes a blog called Information Arbitrage.

    For months, the government has struggled with how to deal with mortgage loans gone bad and other risky securities. The market for such assets has collapsed, which means the banks can't sell them off to investors.

    At the same time, financial companies are required under the "mark-to-market" accounting rules to adjust the assets' values to reflect current market conditions. In other words, a pool of residential mortgages that a year ago was worth $100 million might today be worth $50 million. The bank holding that pool must reflect the loss on its books, even if it's just a paper loss.

    That's one big reason banks have taken massive writedowns over the past two years. Those writedowns, in turn, have put a strain on their capital — the measure of how much money is on hand. Because banks are required to have certain minimum capital requirements, they have curbed lending to businesses and consumers to conserve their capital.

    But now there is a glimmer of hope that a solution is on the way.

    The goal of the Obama plan is to help create a market for securities nobody seems to want. The first step is to place a value on them because few people are really sure what they're worth.

    Unveiled Monday, the plan will take up to $100 billion from the government's existing $700 billion financial-bailout pot. It will then pair that with private investments and loans from the Federal Deposit Insurance Corp. and the Federal Reserve to generate $500 billion in purchasing power.

    Banks would unload their troubled assets and securities to investors. Investors, in turn, hope to eventually turn a profit.

    But another plan to deal with the toxic assets could negate the government's effort.

    For months now, banks and their lobbyists have called on lawmakers and regulators to suspend the mark-to-market rules. They claim the rules force banks to report huge paper losses, even on assets they don't plan to sell. The losses are artificial, they say. This has exaggerated the current crisis.

    Supporters of mark-to-market argue that the rules provide investors with a clear picture of a company's finances at that moment. Without the rules, investors wouldn't be able to measure the impact of the housing and credit collapse. And besides, if the value of the assets increase, the companies will take big gains in the future.

    But changes look more likely. Earlier this month lawmakers threatened to enact laws that would alter mark-to-market accounting if there was no quick fix from the Financial Accounting Standards Board, or FASB, which sets U.S. accounting rules.

    "Relief is needed now and action must be taken immediately to help bring certainty to the markets," Republican Rep. Spencer Bachus of Alabama said during a session of the House Financial Services subcommittee.

    On March 17, the FASB proposed changes that would give companies more leeway when valuing assets. One would allow for "significant judgment" on the part of bank managers to determine if a market isn't functioning. Executives then would have discretion over setting the value of the security.

    The FASB is expected to decide on this toned-down version of mark-to-market as soon as April 2. If approved — which many in the industry believe is likely — companies could apply new valuation requirements in the current quarter, which for most companies will end in late April.

    The fear is that companies will use this leeway to boost the value of the loans on their books to "unrealistic levels," said Robert Willens, an expert on tax and accounting issues for Wall Street clients.

    "The FASB's relaxation of these rules might come at the most inopportune time," he said.

    In the short run, banks would benefit by raising the value of these assets. But don't expect it to be a cure-all

    Higher values could drive prospective private investors away. Investors don't want to overpay, even if they do have help from the government.

    If that results in assets remaining on the banks' books, they may still be resistant to lend. That's because they will worry about how such assets could perform in the future, Ehrenberg said.

    Investors have been hopeful that a fix to this crisis is near. We aren't there yet.

  2. Anonymous Says:

    March 29 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner said some financial institutions will need substantial government aid, while warning against any attempt to tax investors who join a federal program to buy tainted assets from banks.

    “Some banks are going to need some large amounts of assistance,” Geithner said today on the ABC News program “This Week.” The terms of a $500 billion public-private program to aid banks “cannot change” for investors or they’ll lose confidence in the plan, he said on NBC’s “Meet the Press.”

    The Obama administration is pursuing the most costly rescue of the U.S. financial system in history while facing taxpayer concerns the aid is bailing out Wall Street firms that took excessive risks. After allocating about 80 percent of $700 billion in aid approved by Congress, administration officials want to keep open the option of seeking more.

    Geithner said the Treasury has about $135 billion left in a financial-stability fund while declining to say whether he will request additional money.

    “If we get to that point, we’ll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively,” he told ABC News.

  3. Anonymous Says:

    I can not sign up for the podcast. Is anyone else getting this error?

    "This recipient is currently unable to receive money."

  4. jeff Says:

    a simple link would be fine


    Now thats a great post.